Household debt in Canada has continued to skyrocket. As of the fourth quarter of 2016, Canadian consumers owed a record $1.67 for every dollar of disposable income they earned. Yet insolvency rates per person have fallen since peaking in 2009, with Ontario consumer insolvency rates expected to fall again in 2016 to levels not seen since 2001.

Matching this overall decline in consumer insolvency rates, Joe Debtor’s debts have also fallen. So why are some people filing insolvency while others with massive debt loads are not?

Joe Debtor: Life on the Margin

Today’s Joe Debtor is not just burdened with debt, he is financially vulnerable. He, or she, is likely part of an identifiable at-risk group: lower income, struggling middle class, student debtors, lone-parents, retired seniors or on disability. These groups represent the “core” insolvent debtor we see today. More information about who these at-risk groups are, and why they file insolvency see our sections on:

Primary Reasons People Give for Filing Bankruptcy

In Canada, in 2016, just over 130,000 individuals filed a consumer proposal or personal bankruptcy¹. In our experience, their financial problems develop for a number of reasons.

Listed Causes of InsolvencyRate
Overextension of credit, financial mismanagement, unexpected expenses57%
Job related (unemployment, layoff, reduction in pay)55%
Marital or relationship breakdown14%
Illness, injury, and health related problems14%

Financial Mismanagement

Obviously, the generic term “financial mismanagement” is a large contributing factor. In fact, when asked for the cause of their financial difficulties, 57% of our debtors listed “over extension of credit and financial mismanagement” as the leading cause of their financial problems.

Millennials are more likely (63%) to list financial mismanagement as a cause of their insolvency followed by seniors (60%). For millennials student debt becomes a burden they cannot repay if they are unable to find suitable employment in their field.  They are also more likely than any other age group to use payday loans.  In contrast, seniors are dealing with credit card debt accumulated over a lifetime and often have the strongest moral obligation to repay their debts.

Financial mismanagement can include overspending and excessive use of credit, but it often is as simple as not planning for unexpected expenses, such as a car or house repair. When you combine the lack of savings with a major unexpected expense, consumers often turn to credit as a means of making ends meet.

In part, due to the guilt associated with filing bankruptcy, most of the people we see hold themselves wholly responsible for their misfortune and they may not recognize the underlying problems that pushed them into insolvency.

In our experience, a debtor’s financial mismanagement was either caused by, or dramatically increased by, a life altering event. The most common of these include marital separation or divorce, job loss and personal illness.

An increasing factor among those filing insolvency is the increased prevalence of high-risk, high-cost debt. The use of payday loans, quick and easy cash instalment loans and high-risk vehicle financing is on the rise. These debt choices are invariably more expensive than traditional debt, and often even more expensive than credit card debt. Overall, higher borrowing costs, whether due to overall debt levels or choice of debt product, increases a debtor’s insolvency risk.

Separation and Divorce

The general myth is that filing for bankruptcy may cause more family stress and may even lead to divorce. However, we have found the opposite to be true. More than one-quarter (27%) of our clients were separated or divorced at the time of their filing and 14% of our clients cited marital or relationship breakdown as the cause of their financial difficulties.

It is easy to see how the end of a relationship might cause financial problems.  While a couple is together they may have two incomes, but only one set of living expenses (rent, utilities, groceries, etc). They make plans based on the assumption that the relationship will last forever; they incur debt for cars, mortgages on houses and other consumer items.  Once separated, each partner will have their own rent, utilities and other expenses. They will also be limited to their own income. While they are adjusting to their new reality, recently separated people often rely on credit to pay their bills.  This leads to more debt than either party can service, and a proposal or a bankruptcy is often the final result.

Job Loss or Reduced Income

While unemployment has fallen in Ontario since our last report, 55% of our clients indicated that job related issues contributed to their financial difficulties.  This is a significant increase from 37% just two years ago despite Ontario’s strong economic recovery. The major reason is that most insolvent debtors today are in an financially vulnerable risk group who are struggling to make ends meed on a lower than average income. Unstable employment and under-employment are a major concern for millennials and single-parents while older debtors deal with early retirement issues.

Job-related factors can include unemployment and temporary or permanent layoff, but often includes a reduction in income due to a decrease in overtime or a cut-back in total hours worked. It can also include working temporarily in a low-paying job while searching for work that matches their field. If debtors do not have, or have used up their savings and their income is reduced, credit is often used to make up the shortfall.  In fact, less than 1% of insolvent debtors had any cash savings or emergency fund available to help pay bills and keep up with debt payments.

Medical & Health Problems

Despite universal health care in Canada, 14% of our clients cited illness, injury and health related problems as a cause of their financial difficulties.   Pre-retirement debtors (those aged 50-59) reported the highest rate of health related issues at 19% as a they are forced into early-retirement or are on disability due to health reasons.  In fact 10% of pre-retirement debtors were on disability at the time they filed insolvency.

For some, financial trouble starts with time off work recovering from their health problems. During their convalescence they may use credit to survive and pay their day-to-day bills. Once they return to work, they are left with more debt than they can handle. Others may not be able to return to full-time work and find that their disability income is not sufficient to pay their debts as they come due.

In summary, for most people, financial problems are the result of some major life-altering event. Certainly these people must assume responsibility for their insolvency, but in most instances, their financial problems are really a result of not planning for a “rainy day” and not because they set out to deliberately incur more debt.